Strong, strong jobs!
Markets looked for a nonfarm payroll (NFP) gain of around 85,000 for May – but the reported increase of 172,000 blew that out of the water. Moreover, the prior two months were revised higher by a combined 93,000. The U-3 unemployment rate was stable at 4.3 percent in May, while the broader U-6 rate (including measures of underemployment) slipped to 8.1 percent. Perhaps the only “bad” news in the report was that the labor force participation rate stayed at a relatively low 61.8 percent.
Today’s numbers brought the 3-month average gain for NFP up to a strong 188,000. This is well above what most analysts view as sustainable given changing immigration policies and demographics (estimated at around 50,000 by us, but as low as 0 by many others). Even removing a strong gain in state and local employment gains, private employment increased by 120,000 for May (and by an average of 166,000 over the past three months) – well above that sustainable pace. Yet the unemployment rate has not declined. Different surveys, to be sure, but perhaps analysts have underestimated the sustainable pace of job growth.
With the ISM surveys showing solid gains for both manufacturing and services, the strong gains in NFP indicate that the economy is on solid footing – perhaps even too strong if lower estimates of sustainable job gains are accurate. The Federal Reserve has two mandates: maximum sustainable employment and stable prices. The employment mandate is clearly being successfully achieved, but with inflation remaining above 3 percent (and perhaps moving higher), the inflation mandate is failing. Is this only a temporary situation, with strong productivity gains and the potential for lower energy prices in the future (after the conclusion of the war with Iran and normal transit through the Strait of Hormuz resumes)? Or is the economy overheating, with supply shocks (oil and tariffs) adding to froth? The Fed is likely to wait before changing monetary policy to see which of these two paths the economy is following. But eventually the Fed will have to make a call and start to either ease or tighten monetary policy (at least a little).
David W. Berson, Ph.D., CBE
Chief Economist
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